Question

Miller Company makes two types of chairs. One of the chairs is a rocking chair. The other is a straight-back chair. Both chairs are made by hand. Miller Company uses a companywide overhead rate that is based on direct labor hours to assign overhead costs to the two products. If Miller automates the production of straight-back chairs and continues to use direct labor hours as a companywide allocation basis:

Answer 1

Answer:

C. straight back chairs will be overcosted

Explanation:

Miller Company makes two types of chairs. One of the chairs is a rocking chair. The other is a straight-back chair. Both chairs are made by hand. Miller Company uses a company-wide overhead rate that is based on direct labor hours to assign overhead costs to the two products. If Miller automates the production of straight-back chairs and continues to use direct labor hours as a company-wide allocation basis:

A. rocking chairs will be undercosted

B. There should be no impact on unit cost  

C. straight back chairs will be overcosted

D. rocking chairs will be overcosted.

EXPLANATION

If Miller automates the production of straight-back chairs and continues to use direct labor hours as a company-wide allocation basis then the straight back chairs will be overcosted because the automation process directly implies that it no longer drives labor hours since it is no longer made by hand.

Automated processes should use machine hours rather than labor hours, for the allocation of its overhead.

Answer 2

Answer:

The question is incomplete, the options include:

a). rocking chairs will be undercosted

b). there should be no impact on unit cost

c). straight back chairs will be overcosted

d). rocking chairs will be overcosted. is Correct

Explanation:

The immediate working hours of straight back chairs will be shortened following the automation of straight back chairs, and that of rocking chairs will remain unchanged.

Suggesting the overall overhead remains unregulated, Gross Direct working hours would minimize the ratio of Direct rocking chair working hours in total direct working hours.

And the overhead distribution on the basis of Direct Labor hours for Rocking chair would also increase as before. And it would overcost the rocking chairs.